According to this research, inequality raises residential segregation. This is worrisome in part because the increase in segregation can cause problems that feedback to both amplify and perpetuate the inequality:

Inequality and the Measurement of Residential Segregation by Income In American Neighborhoods, by Tara Watson, NBER Working Paper No. 14908, April 2009: Abstract American metropolitan areas have experienced rising residential segregation by income since 1970. One potential explanation for this change is growing income inequality. However, measures of residential sorting are typically mechanically related to the income distribution, making it difficult to identify the impact of inequality on residential choice. This paper presents a measure of residential segregation by income, the Centile Gap Index (CGI) which is based on income percentiles. Using the CGI, I find that a one standard deviation increase in income inequality raises residential segregation by income by 0.4-0.9 standard deviations. Inequality at the top of the distribution is associated with more segregation of the rich, while inequality at the bottom and declines in labor demand for less-skilled men are associated with residential isolation of the poor. Inequality can fully explain the rise in income segregation between 1970 and 2000. ...

... Why is economic segregation across neighborhoods important? Income sorting affects the distribution of role models, peers, and social networks. Sociologists such as Wilson (1987) hypothesize that the lack of neighborhood exposure to mainstream middle-class role models and social networks is a major contributor to urban joblessness and social problems. A number of empirical papers also suggest that the characteristics of one's neighbors and peers in school affect outcomes (Case and Katz (1991), Cutler and Glaeser (1997), Hoxby (2000)), though the issue is far from settled (e.g., Oreopoulos (2003), Kling, Liebman, and Katz (2005)). Residential decisions have implications for commuting behavior and the allocation of public goods. If residential choice is sensitive to the income distribution, economic policies that moderate or amplify income inequality may shape the cities in which we live.

The importance of income segregation in metropolitan areas is heightened by the rapid urbanization of the world's poor. As noted by Doug Massey in the 1996 presidential address to the Population Association of America, "[the] hallmark of the emerging spatial order of the twenty-first century will be a geographic concentration of affluence and poverty. Throughout the world, poverty will shift from a rural to an urban base; within urban areas poor people will be confined increasingly to poor neighborhoods, yielding a density of material deprivation that is historically unique and unprecedented" (p.399). The issue addressed in this paper is also important because of the high and rising levels of income inequality found in many countries. Machin (2008) reports that male wage inequality grew substantially between 1980 and 2000 in Australia, Germany, Italy, Japan, the Netherlands, New Zealand, Sweden, the U.K, and the U.S., for example. ...

... Although this paper has not explored the effect of income segregation on individual outcomes, a number of researchers believe that neighbors matter. A widening of the income distribution affects the prices of housing and neighborhood attributes, making it more costly for low-income families to live near high-income families. Through this price externality, housing markets amplify the effect of income inequality on the well-being of different socioeconomic groups. If neighbors particularly affect the outcomes of children, this mechanism may also strengthen the link between equality in the income distribution and intergenerational mobility.

Alberto Alesina and Paola Giuliano ask, "Will Americans turn into 'inequality intolerant' Europeans?" They use the word intolerant because they believe that "The increase in income inequality of the last three decades in the US is not extraordinary if viewed from a very long-term perspective," therefore the recent increase in inequality and social immobility shouldn't be viewed as unfair. But I don't see why the distribution or degree of immobility in the past was necessarily fair just because it prevailed, nor why the recent increase in inequality - which we know was based in large part upon false valuations and hence false rewards - should be viewed as justifiable in any case:

Many will consider this reduction in inequality the silver lining of the crisis and a welcome development. This is especially the case because many people are acutely aware of the increase in income inequality that occurred in many (especially English-speaking) countries in the last three decades and perhaps tend to think of it as "unfair". Those who became rich from complicated financial instruments and sophisticated investments in derivatives are now seen as undeserving of their wealth. The extraordinary bonuses of certain incompetent managers, especially those bailed out by the taxpayers, have certainly not helped gain them sympathy. Nevertheless, a frontal attack on the finance world is pure populism; finance serves a very productive purpose. One cannot mix criminals like Bernie Madoff with unlucky or even excessively leveraged, overly risk-taking, sometimes incompetent, and overpaid managers. Politicians should not throw fuel on any anti-finance or anti-Wall Street sentiments. There is enough anger against "unfairly" accumulated wealth; we do not need more.

The increase in income inequality of the last three decades in the US is not extraordinary if viewed from a very long-term perspective. The thirty years after the Second World War were the period of the "Great Compression" – a sharp reduction in income inequality (Piketty and Saez 2003). A few months ago, just before the crisis, we were back to roughly to the level of the 1920s, which was the norm in previous decades, not to mention the level of inequality and of social immobility of pre-capitalist societies. But the perception that this increase in inequality was unfair will greatly weigh on the way it will be handled and the political backlash it will create.

Our research (Alesina and Giuliano 2009) suggests that this is a situation in which voters will demand especially strong action to reduce inequality, even in a country like the US, where inequality is much more tolerated than in Europe. All over the world, the poor favour more redistribution than the rich, which is not surprising. But beyond that basic fact, the attitude towards what is the right amount of redistribution varies greatly and is affected by many more variables than just current income. In particular, when people perceive that the income ladder is the result of differences in hard work, effort, and creativity, even the relatively poor may accept large differences in income. This is partly because their sense of justice tells them that these are fair inequalities and partly because they feel that the income ladder can be climbed if it really depends only on effort and hard work. This is true both when comparing individuals within a country and comparing average attitudes across countries.

For instance, according to the World Values Survey, a large majority of Americans (around 60%) used to believe that the income ladder could be climbed and the poor could make it if they tried hard. Only a minority of Europeans (less than 40%) had the same view. That explains a lot of the difference in the generosity of the welfare state in the two places. Americans think that they live in a socially mobile society with less need for active public redistributive policies. Europeans, by and large, have the opposite feeling. Now Americans may feel that the social mobility that they cherished was not so large after all; investing in derivatives hardly has the same "feeling" in the popular sentiments as, say, working a late shift in a shop.

Therefore, this crisis may have changed American attitudes toward inequality a bit. If they perceive inequality as unfair they will demand more redistribution. The traditional aversion to taxation of Americans may give way to a "soak the rich" feeling. Higher taxes will be needed to handle the booming budget deficits. We would predict that the progressivity of the tax system will also increase, as the median voter will demand it. Politicians should resist such populist measures. Increasing the tax base rather than the brackets is the best way to increase taxes on the rich. A simplification of the byzantine tax code, where the wealthy can often hide income, is way overdue.

Will Americans turn into "inequality intolerant" Europeans? Probably not, but this crisis may imply a turning point towards more government intervention and towards redistribution.

The TALF program intended to increase auto loans, student loans, and credit card lending has a lot in common with the Geithner public private investment plan to remove toxic assets from bank balance sheets, including the valuable non-recourse loan feature. The fact that the TALF program is not living up to expectations - not even close - leads to questions about whether the Geithner plan will encounter similar problems:

Under [the Term Asset-Backed Securities Loan Facility, or] TALF, private investors ... put up a relatively small amount of money to be matched with a larger loan from the Federal Reserve. The combined funds are then used to purchase newly created, highly rated securities, which in turn fund a wide range of consumer and business lending.

If the securities become more valuable, the private investors stand to repay their government loans and make a healthy profit; if the securities plummet in value, the investors can lose only what they put up originally...

Officials envisioned TALF supporting tens of billions of dollars a month in new lending, saying it could eventually total $1 trillion. But in March, when it was launched, it backed only $4.7 billion in auto loans and credit cards. For April, it logged only $1.7 billion.

Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. ... There are restrictions on the business activities of participants in the program. ... But perhaps more significant ... is a fear that the government could retroactively change the terms, exacting new limits on what investors can pay their executives, for example, or trying to claw back profits that firms make in the program. ...

Federal Reserve officials have privately urged President Obama and congressional leaders to publicly state that the government views investors in voluntary programs such as TALF differently than it does companies that need a federal bailout.

Investors are not the only ones who need comforting, though. The Fed relies on primary dealers, or brokerage houses, to play a key role as intermediaries in TALF...

But the primary dealers have been extremely cautious..., hobbling the program's progress... Lawyers at the New York Fed ... have been working to help the brokers and investors work through the issues, and government officials are hopeful about the program's future. ...

The Public-Private Investment Program, designed to buy loans and securities from banks, is structured similarly to TALF. ...

And the differences between the PPIP and TALF programs that I can think of, e.g. that the PPIP has toxic assets as part of the bargain, and some of the banks will need a bailout so the reassurances about executive pay, etc. can't be made in these cases, are additional factors working against the PPIP's success.